46.

Assume that a company manufactures numerous component parts, one of which is called Part A. The company makes 50,000 units of Part A per year and its absorption costing system indicates that, at this volume of production, it costs $23.00 per unit to make this part:

Direct materials	$	10.00
Direct labor		6.00
Variable overhead		2.00
Fixed overhead		5.00
Total absorption cost per unit	$	23.00

The company is trying to decide between two alternatives: Alternative 1: Continue making 50,000 units of Part A annually using its existing equipment at the unit cost shown above. The equipment used to make this part does not wear out through use and it has no resale value. Alternative 2: Purchase 50,000 units of Part A from a supplier at a cost of $18.94 per unit. If the company chooses alternative 2, it believes that $180,000 of the fixed manufacturing overhead cost being allocated to Part A will continue to be incurred. What is the financial advantage or (disadvantage) of buying the parts from a supplier?

Multiple Choice

• $23,000

• $130,000

• $(23,000)

• $(130,000)